Friday, February 05, 2010

Ryanair ranks in the bottom 10 of 581 companies on ethics (based on social responsibility, environmental awareness, etc), compiled by Geneva-based Covalence. Henry at Crooked Timber notes that Ryanair is unique among its low ranked brethren: it seems to covet its slimly image.

The company prides itself not only on being perceived as having no social conscience, but as having a reputation for screwing its customers as systematically and mercilessly as possible. Which other airline’s CEO would announce that he wanted to charge passengers to use the toilet as a publicity stunt? Clearly, Ryanair thinks that this reputation is a money spinner for them (it is quite deliberately cultivated), and they have indeed made quite a lot of money. But why (if they are right) would a reputation for shafting your customers be a commercial asset for a consumer-oriented business in a relatively competitive sector? The standard economic account doesn’t seem to provide much insight. Help me out here.

There are many sloppy explanations, but three good ones stand out.Ryanair is trying to attract well-informed consumers who will see the add-on charges beforehand and adjust for it; they end up with a very cheap airfare (it's apparently an inexpensive way to travel) and no surprises. Ill-informed consumers end up footing the bill. This is a nifty argument but I don't see it holding in equilibrium, especially when you're issuing press releases about charging for using the bathroom. Something like that is likely to get out to even the poorly informed consumer.

Ryanair is signalling safety. Since they are inexpensive, the company is showing where they get revenue from thus customers aren't afraid that they got a deal because the firm skimped on safety checks. But it seems that the safety regulations which govern air travel would put customers' mind at ease. At the same time, you could argue the fear is that they cut corners in other ways, such as paying their flight attendants very little which would result in rude service.

Ryanair is signally honesty and reliability. When you travel, there's a lot of stress so when you discover some small fee it seems like a much bigger problem than it is. By outlining all their add-on costs before you pack your bags, they're cutting out uncertainty (and the fear of uncertainty). Yeah, you have to pay to use the bathroom, but since you knew about it ahead of time, it doesn't seem as bad as if you discovered it after drinking six glasses of water. Since everyone knows companies spin the truth in commercials, blatantly not spinning it sends a strong signal that "this is all you will have to deal with."

What I like about this last argument is that it bears a striking resemblance to Domino's "sorry we had horrible pizza but now it's good" campaign. Some commentators laugh at it, replaying old commercials touting the flavor of Domino's "cardboard." But no one really cares; every pizza chain says their pizza is great. But Domino's admitting a lot of people didn't like and now we're fixing it speaks volumes. Down right honesty is often an under appreciated business practice.